[Abstract]
According to the rules of China UnionPay on credit card transactions, an acquiring bank or firm (“acquirer”) shall pay the issuing bank (“issuer”) transaction processing fees calculated based on the transaction amount and the fee rate established by China UnionPay.
In this present case, the issuer alleged that the acquirer failed to pay the processing fees. The central issues were: what is the legal relationship between the issuer and the acquirer in absence of a written contract between the two; and whether the issuer is obligated to verify the merchant category codes (MCC) involved in transactions and if yes, whether the acquirer’s liability should be mitigated accordingly.
In view of the nature of transactions between the two parties and provisions of Article 10 of the Contract Law of the People’s Republic of China on contract forms, the court held that, in credit card transactions, a funds clearing contract was formed between the issuer and the acquirer under the regulations of the People’s Bank of China on acquiring bank business and the transaction rules of China UnionPay. In addition, because the relevant merchants privately changed the MCC set in the POS terminals and there is no evidence to suggest that the issuer has an obligation to double check the MCC, the acquirer should be fully liable for the processing-fee loss suffered by the issuer due to the setting and sending of erroneous MCC.
[Keywords]
Acquiring bank; funds settlement; double check obligation; liability for compensation
Plaintiff: Pacific Credit Card Center of Bank of Communications; business address: Free Trade Zone, Shanghai, China
Responsible Person: Wang X Dong, the General Manager.
Defendant: Kayou Payments Co., Ltd., domiciled in Jiading Industrial Zone, Shanghai, China.
Legal Representative: Shangguan X Yan, the Chairman.
The lawsuit was filed by Pacific Credit Card Center of Bank of Communications (the “Credit Card Center”), the Plaintiff, with the People’s Court of Jiading District, Shanghai, against Kayou Payments Co., Ltd. (“Kayou”), the Defendant, regarding other disputes over ownership.
Credit Card Center stated that it and Kayou, both being members of China UnionPay, are willing to be bound by the transaction rules of China UnionPay.
According to the Letter of China UnionPay on Release of the Action Plan to Adjust Processing Fees for China UnionPay Card Transactions, an issuer may, for each single domestic China UnionPay card transaction, charge a processing fee equaling 0.35% of the transaction amount or up to RMB 13 per transaction in the case of debit cards (including prepaid cards) and 0.45% in the case of credit cards (including quasi-credit cards (i.e., cards combining the features of a debit card and a credit card)).
The Plaintiff further alleged that from January to March 2018, Kayou performed acquiring service for credit cards issued by the Credit Card Center, during which 315,610 transactions were generated from Beijing Nuo Tai Long Car Accessories Co., Ltd. and other merchants under the same MCC of 9498 with a total amount of RMB 2,119,974,958.42. According to the transaction data and the MCC provided by Kayou, China UnionPay classified these transactions under the category of credit card repayment, and completed the settlement by paying the Credit Card Center the processing fee of RMB 473,405.50 at the rate of RMB 1.5 per transaction as is applicable to credit card repayments.
In June 2018, the Credit Card Center found that the transaction data provided by Kayou was questionable, and sent an official letter to Kayou, stating that in routine monitoring of transactions, the Credit Card Center detected that certain credit card purchases transmitted from Kayou illegally applied the MCC of 9498, the code for credit card repayment; and from January to March 2018, there were 315,610 such wrongly coded transactions involving a total amount of RMB 2,119,974,958.42. Kayou, in a letter of apology, sincerely apologized for the processing-fee loss suffered by the Credit Card Center due to using MCC 9498 for purchases.
Kayou, however, failed to compensate for such loss; therefore, the Credit Card Center filed the lawsuit with the court of first instance, requesting Kayou be ordered: (1) to compensate for the processing-fee loss of RMB 9,066,481.81 suffered by the Credit Card Center; and (2) to pay the Credit Card Center the penalty interest accrued thereon from July 7, 2018 to the payment date ordered by the judgment at a rate equaling the then prevailing benchmark loan rate published by the People’s Bank of China.
The Defendant Kayou contended that: (1) it did not wrongly apply the MCC of 9498 and the MCC it used was correct. In a transaction, Kayou would send the transaction data to China UnionPay, who would then forward them to the Credit Card Center for verification. As such, Kayou’s sole responsibility in this whole process was to transmit the complete transaction data. Upon receiving such data from China UnionPay, the Credit Card Center did not raise objections with Kayou. (2) Even if any error did occur in respect of the transactions from January to March 2018, Kayou had nevertheless duly performed its verification obligations, whereas the Credit Card Center has not provided the details of the transactions in question to date. To prove that the Defendant wrongly applied the MCC, the Plaintiff needs to show that the MCC uploaded by the relevant merchants was different from that sent by Kayou to the Credit Card Center. Therefore, all claims of the Credit Card Center are groundless and warrant dismissal.
The People’s Court of Jiading District, Shanghai, found in the first instance that facts alleged by the Credit Card Center are true.
The court of first instance held that Kayou should be liable for compensation for the loss suffered by the Credit Card Center, and the Credit Card Center’s claim for such loss has sound legal ground, because the facts showed that Kayou provided a wrong MCC in violation of the acquiring service rules of China UnionPay, as a result of which, the processing fee the Credit Card Center received for the transactions in question was calculated at a lower rate than that which should have been applicable to those transactions, which were in fact purchases.
Therefore, in accordance with Article 60, Article 107 and Article 113 of the Contract Law of the People’s Republic of China, the court of first instance ordered that Kayou shall, within 10 days of the judgment, pay the Credit Card Center RMB 9,066,481.81 as compensation for such loss and the penalty interest accrued thereon from July 7, 2018 to the date of the judgment at rates applicable to two separate periods: from July 7, 2018 to August 19, 2019 at the then prevailing benchmark loan rate of the People’s Bank of China, and from August 20, 2019 to the date of the judgment, at the Loan Prime Rate published by the National Interbank Funding Center.
Kayou was dissatisfied with the judgment in the first instance and filed an appeal with the Shanghai Financial Court, requesting the judgment in the first instance be vacated, with all claims made by the Credit Card Center in the first instance dismissed, on the following facts and grounds:
1. The court of first instance erred in its determination of the legal relationship between the Appellant, Kayou, and the Appellee, the Credit Card Center. According to Article 51 of the People’s Bank of China’s Administrative Measures for Bank Card Acquiring Service ([2013] No. 9), the Appellant provided the payment settlement service on behalf of merchants; in this connection, the transactions were in effect conducted between the holders of cards issued by the Appellee and the merchants, while the Appellant, as the agent of the merchants, was only responsible for reporting the data of transactions generated by the merchants to China UnionPay. Therefore, no contract on multilateral funds clearing was formed between the Appellant and the Appellee under the transaction rules of China UnionPay;
2. The Appellant should not be liable for compensation for the loss suffered by the Appellee. The Appellant reported the transaction data to China UnionPay on behalf of the merchants, which data were verified by the Appellee. Therefore, the losses arising therefrom should be borne by the Appellee. Furthermore, the Appellant had set the correct MCC for the merchants; the error in transaction type was caused by the merchants. In addition, the Appellee was also at fault for not discovering the plainly wrong MCC for months after receiving the data, and should bear the corresponding liabilities. Lastly, China UnionPay did not, in its attempt to resolve the disputes between Kayou and the Credit Card Center, penalize the Appellant, suggesting that the Appellant did not violate the relevant rules;
3. The court of first instance erred in determining the amount of compensation payable by the Appellant. Upon further investigation, the Appellant believed that the amount should be lowered because some of the 315,610 transactions were correctly coded, though the Appellant did not have enough time to complete data verification for the trial of the first instance.
The Appellee, the Credit Card Center, in its response argued that the judgment of the court of first instance was rendered based on clear factual findings and the correct application of the law and, requested the court of second instance to dismiss the appeal and affirm the judgment in the first instance.
The Shanghai Financial Court (the “Court”) affirmed in the second instance the factual findings of the court of first instance.
Issues were identified in the second instance as follows: (1) what is the legal relationship between the Appellant and the Appellee in the absence of a specific contract between the two; (2) whether the Appellant should be liable for compensation for the processing-fee loss suffered by the Appellee and if yes, to what extent; and (3) whether the compensation amount determined by the court of first instance is correct.
The Court held in the second instance that:
1. A contract on funds clearing was formed between the issuer and the acquirer herein under the Administrative Measures for Bank Card Acquiring Service and the relevant service rules of China UnionPay, and the rights and obligations of the two parties are established by such a contract accordingly. The reasons are as follows:
(1) The Appellant and the Appellee each acknowledged that it is an entity willing to be bound by the credit card transaction rules of China UnionPay. Furthermore, the People’s Bank of China’s Administrative Measures for Bank Card Acquiring Service provided the definition for acquirers and defined how such firms should manage the merchants, what rights and obligation the acquirers have, and how they should manage their risks.
China UnionPay, an association established by bank card issuers, provides clearing and settlement services for intra-bank funds flow. As such, it needs to have in place operational rules to regulate relevant business activities to ensure funds settlements take place on a true, safe and convenient basis. Members of China UnionPay, upon being admitted, are required to express their willingness to be bound by the Guidelines for Provision of Credit Card Repayment Service and other rules of China UnionPay. In the present case, the Appellant and the Appellee, being the acquirer and the issuer respectively, are both members of China UnionPay and willing to be bound by the said rules and guidelines. Accordingly, their respective rights and obligations and the income distribution model applicable to them for the purpose of the credit card acquiring service are defined by the Administrative Measures for Bank Card Acquiring Service and other regulatory policies, as well as by the service rules of China UnionPay, including, among others, the Detailed Rules for Application of Merchant Category Codes for Merchants and the Letter of China UnionPay Regarding Release of the Action Plan to Adjust Processing Fees for China UnionPay Card Transactions.
(2) The processing fee actually paid by the Appellant to the Appellee for credit card purchases had been calculated according to the rates determined by the transaction rules of China UnionPay. Both parties confirmed that they follow such rules, and that in all credit card transactions other than those under dispute in the present case, income distribution between them has been conducted in accordance with the rules and model established by China UnionPay, over which the parties have no dispute. Even in the 315,610 transactions in dispute, the Appellant had paid the Appellee the transaction processing fee at the rate of RMB 1.5 per transaction as established by China UnionPay for MCC 9498 transactions. Pursuant to Paragraph 1, Article 10 of the Contract Law of the People’s Republic of China, parties may conclude a contract in written, oral or other forms. Consequently, although the Appellant and the Appellee did not directly execute a contract, the fact that the two parties followed the transaction rules of China UnionPay, and during the actual transaction and settlement process, exercised rights and performed obligations according to such rules, and settled, paid, and charged the bank card transaction processing fee at the fee rates established by such rules, was sufficient for the Court to find that a funds clearing contract was formed between the two parties.
The Appellant claimed that it is an agent of the merchants under Article 51 of the Administrative Measures for Bank Card Acquiring Service. But said Article 51 only defines the terms “merchant,” “payment terminal,” “network payment interface,” and “bank card clearing institution,” and in the definition for “merchant,” it was only mentioned that merchants should engage an acquirer for transaction settlement, with no specific wording as to the funds clearing relationship between an acquirer and an issuer. Accordingly, Appellant’s denial, based on the cited provision, of its legal relationship with the Appellee with respect to funds clearing is without merit.
2. Contributory liabilities are irrelevant to this case, and the acquirer should fully compensate for the issuer’s lost processing fees. First, Paragraph 1, Article 25 of the Administrative Measures for Bank Card Acquiring Service requires the acquirer to, based on the true transaction scenarios and according to the relevant service rules and administrative measures established by the bank card clearing institution and the issuer, correctly identify the transaction category and accurately transmit the complete transaction data to ensure such data are complete, truthful and traceable. The obligations of the acquirer to determine and transmit the MCC in credit card purchases are therefore clearly defined. In the 315,610 transactions in this case, the MCC set by the Appellant for the merchants, and eventually reported to the Appellee, was 9498. This MCC, however, is applicable to credit card repayments and only permits debit cards, rather than credit cards, prepaid cards or cards of other nature, to be the payment card. The factual finding showed that all MCCs involved in this case were 9498, amounting to 315,610 transactions totaling RMB 2,119,974,958.42; and that among the merchants were Beijing Nuo Tai Long Car Accessories Co., Ltd. and others, which are clearly different from the normal payers of credit card bills. In addition, in its Letter of Apology to the Appellee, the Appellant itself acknowledged that, for reasons attributable to the Appellant, the relevant merchants processed the transactions under MCC 9498, resulting in reduced processing fee for the Appellee. Furthermore, the Appellant has not provided any evidence to date to show that after it had set the correct MCC for the merchants, they privately changed such MCC and, hence, caused the Appellant to transmit the wrong data. The Appellant also failed to provide evidence showing that under the provisions of the Administrative Measures for Bank Card Acquiring Service or other relevant credit card transaction rules of China UnionPay, the issuer is obligated to double check the MCC received from the acquirer before proceeding with the credit card payments.
Given the above analysis, the acquirer is obligated to set the correct MCC for the merchants and send it to the issuer. It is therefore reasonable for the Appellant to be held liable for full compensation for the processing-fee loss suffered by the Appellee as a result of the wrong MCC, because the Appellee set and sent the wrong MCC 9498 which did not reflect the true credit card use scenarios, and because there was no fault on part of the Appellee. As for the Appellant’s argument that no penalty from China UnionPay suggested that it did not violate any rule in this matter, the Court held that such argument is without merit, since China UnionPay was only trying to mediate the dispute according to its rules and the results of this mediation are not a condition precedent for the civil lawsuit between the parties.
3. The reason given by the Appellant for reducing the amount of compensation because some of the 310,000 transactions involved were correctly coded, was also groundless. The Court held that the records of the 315,610 transactions in question had been submitted to the Appellant during the first-instance trial for its examination, but it did not provide any evidence to challenge such records. In the second-instance trial, although the Appellant had argued that the amount of compensation should be lowered to account for the correctly coded transactions, it failed to provide any evidence to support this claim as of the end of the discovery stage. Moreover, the court of first instance was correct in finding that when the disputes herein arose, there was no favorable fee rates available to the Appellant to lower the processing fee payable, because as a matter of facts found by the court, the Appellant wrongly applied MCC 9498, which is applicable to credit card repayment, to what were in truth credit card purchases. For these reasons, the Appellant’s allegation that the compensation amount determined by the court of first instance was wrong cannot stand either.
Therefore, in accordance with Article 170 Paragraph 1 Item 1 and Article 175 of the Civil Procedure Law of the People’s Republic of China, the Shanghai Financial Court rendered the following judgment on September 16, 2020:
The appeal is dismissed and the judgement of the court of first instance is affirmed.
This judgment is final.
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